EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Advanced LEED Building Energy Tax Planning

Introduction

The substantial increase in the number of LEED certified buildings in the
United States coupled with the large tax incentives typically available with
LEED certified buildings means that property tax advisers can better serve
their clients if they have a better understanding of the LEED process.
Leadership in Energy and Environmental Design (LEED) is the fast growing
marquee standard for sustainable buildings. LEED is the certification system
established by U.S. Green Building Council (USGBC). Over 40,000 projects are
currently participating in the commercial and institutional LEED process. Over
7.9 billion square feet is involved mostly in the United States. The four
certification achievements start at the LEED certified level and proceed to the
progressively higher LEED silver, gold, and platinum levels. It is crucial for
tax advisers to get evolved at the onset of the LEED evaluation process. We
have seen some companies choose to not proceed with LEED certification and
later regret it when they learn how LEED integrates with tax incentives.

On April 27th 2009, the new LEED 2009 system replaced the previous LEED
rating point system for certifying LEED buildings.

The major differences with the new LEED system are:

1. Adjustments to the LEED point rating system

2. Weighted credits with a focus on energy

3. Regional bonus credits

A comparison of the available LEED points in the original and new LEED
system for each of the LEED sustainable categories is presented below:

The next table presents the new point range for each of the four LEED
certification achievements:

As the tables illustrate, the highest percentage of LEED points is allocated
to Energy & Atmosphere, which . This means that to achieve LEED
certification, a building should utilize energy efficiency and incorporate
renewable energy into its design. A building that fully employs both energy
efficiency and alternative energy measures, not only will achieve a higher
level of LEED certification, but may also qualify for large EPAct tax benefits
and alternative energy tax credits.

The LEED Team

A LEED project requires the participation of at least one LEED Accredited
Professional (AP). That professional can be any LEED AP and typically is the
project's architect, the project's engineer, or a LEED design professional
engaged just to handle the LEED process. Increasingly, many projects have
multiple LEED AP's participating in the project. It is important to make sure
that the main coordinating LEED AP understands the economic importance of the
LEED tax integration process. Any professional can achieve LEED AP status as
long as they have demonstrated experience working on a LEED project and pass
the USGBC LEED certification test.

LEED Constantly Evolves

It is important to realize that the LEED system is constantly evolving and
there is a major focus on both energy reduction and energy generation. The
trajectory is for LEED platinum buildings to reach a net zero energy use
standard by 2018 and to be regenerative by 2030. Net zero buildings achieve
zero energy use by combining energy efficiency improvements with alternative
energy generation. Regenerative buildings generate additional energy above
their own individual building's energy needs.

The EPAct Tax Opportunities

EPAct

Increasing energy-efficiency and alternative energy generation are the main
building tax initiatives supported by large tax savings.

Pursuant to Energy Policy Act(EPAct) Section 179D, properties making
qualifying energy -reducing investments in their new or existing locations can
obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum EPAct $1.80 per
square foot immediate tax deduction, there are tax deductions of up to $0.60
per square foot for each of the three major building subsystems: lighting, HVAC
(heating, ventilating, and air conditioning), and the building envelope. The
building envelope is every item on the building's exterior perimeter that
touches the outside world including roof, walls, insulation, doors, windows and
foundation.

It is normally fairly easy for a building to qualify for the lighting EPAct
tax deduction. The following table presents the range of tax deductions that
are more probable with LEED 2009 buildings:

LEED Building

Potential EPAct Tax Deduction:

Sample Square Footage EPAct Deduction:

LEED measures the energy efficiency of a building by comparing it to the
performance of an ASHRAE 90.1-2007 standard baseline building. Buildings that
demonstrate a greater improvement over the standard are allocated more LEED
points. The table below illustrates the relationship between energy efficiency
percent improvement of new and existing buildings and LEED points.4

Alternative Energy Tax Credits and Grants

There are multiple 30% or 10% tax credits available for a variety of
alternative energy measures with varying credit termination dates. For example,
the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power
tax credit also expires January 1st, 2014. The 30% closed loop and open loop
biomass credit expires January 1st, 2014. All alternative energy measures that
are eligible for the 30% and 10% tax credits are also eligible for equivalent
cash grants for the three years staring January 1st 2009 and ending December
31st 2011.

The Energy and Atmosphere LEED category awards points for utilizing
renewable energy. According to the LEED definition, renewable energy
technologies include solar, wind, geothermal, low-impact hydro, biomass and
bio-gas. The table below illustrates the relationship between amount of
renewable energy on a property and the LEED points awarded.4

% Renewable EnergyLEED Points

Note that alternative energy tax credits are available for a wider range of
tax defined alternative energy measures, including but not limited to fuel
cells and micro-turbines.

Benefits of LEED Buildings

The USGBC lists the benefits of LEED buildings as follows:

•Lowering operating costs and increasing asset value.

•Reducing waste sent to landfills.

•Conserving energy and water.

•Developing healthier and safer buildings for occupants.

•Creating compact and walkable communities with good access to
neighborhood amenities and transit

•Protecting natural resources and farmland by encouraging growth to be
located in areas with existing infrastructure.

•Reducing harmful greenhouse gas emissions.

•Qualifying for tax rebates, zoning allowances, and other incentives in
hundreds of cities.

•Demonstrating an owner's commitment to environmental stewardship and
social responsibility."

We would like to add to this list the fact that LEED buildings typically
generate substantial EPAct tax deductions and alternative energy tax credits.
Increasingly, LEED certification has become the defacto standard for Class A
office buildings and many jurisdictions expedite permitting for LEED buildings.
Expedited permitting saves property developers substantial amounts of time,
where time means money.

Superior Return on Investment (ROI)

Studies performed by McGraw Hill construction demonstrates that LEED
buildings can reduce operating costs by 14%, increase building value by 10.9%
and increase rate by almost 10%. LEED buildings have higher occupancy rates and
support rent premiums.

Cost Benefit Analysis

The amount of specific cost varies by building by LEED professional,
building size and building complexity. In the initial years of the program,
LEED certification added costs of $50,000 to $80,000 for some buildings. The
general trend is for a decrease in LEED certification costs as more and more
design professional are LEED certified and have more LEED experience. For
example pricing for LEED building energy simulation modeling which is required
key element of LEED has decreased rapidly. Complex buildings that used to cost
$15,000 to model can now often be modeled for $7,500 or less.

LEED Project Cost Detail

The most direct cost related to LEED certification is the LEED certification
filing fee which ranges from 3 cents to 5 cents per square ft depending on the
size of the project and whether you qualify for a USGBC member discount. The
actual cost of the LEED design will vary depending on whether an independent
LEED consultant is utilized or whether one of the core design team members is
also handling the LEED certification process.

Since LEED certification is a detailed complex process, experience matters,
and design teams with prior LEED experience are a lot more cost efficient.

The issue of whether there will be increased design costs also depends on
the LEED team's historical design level which is called baseline. Design teams
who's previous projects have been at or near the LEED building design standards
have a much shorter learning curve then those who have never designed at or
near the LEED design level. LEED requires building "commissioning", which is a
relatively expensive process requiring an engineering firm to make sure all the
buildings systems are both operating properly and are properly integrated.
Although commissioning can range from 50 cents to $1.00 per square foot, most
building experts feel strongly that commissioning this is very worthwhile cost
saving process for any building with new or renovated systems regardless of
LEED objectives.

LEED Construction Costs

LEED projects can result in lower or higher construction costs depending on
how one measures construction costs. LEED projects that use building energy
simulation modeling to right size, meaning downsize HVAC systems to the
smaller, less costly and appropriate sizes will save costs. It is known that
most non modeled building oversize HVAC systems adding substantial unnecessary
costs. LEED projects that count alternative energy measures as part of the LEED
process will have markedly higher construction costs. However these same
buildings will have markedly lower energy costs. There are some very common
LEED elements where cost can be estimated. For example demand control
ventilation adds about $1.00 per cfm which is an air volume measure. Bike racks
will cost about $5.00 per full time equivalent employee. Showers and changing
rooms will cost about $400 per full time employee. The USGBC has compiled a
massive study analyzing LEED project costs which can be reviewed at:

http://www.wbdg.org/ccb/GSAMAN/gsaleed.pdf

The Federal Government LEED Building Sector

It is important to realize that with government buildings, the EPAct
benefits go to the LEED design team. The federal government is the single
largest energy user in the United States. It owns, operates, and leases about
500,000 buildings.3 Currently the federal government has approximately 187 LEED
certified projects composing 24 million sq.ft. There are an additional 3,138
federal projects, representing 465 million sq.ft., currently in
registration.

State and City LEED Building Requirements

Many states and cities mandate LEED certification for new government
building construction and increasingly for commercial buildings typically at
the greater than 50,000 square ft level. As of early 2010 34 states and over
200 municipalities had some level of new construction LEED mandate. More
importantly increasingly some of the largest cities in the U.S have LEED
mandates.

In the year 2,000 Seattle was the first city to mandate LEED silver
certification for new civic buildings. San Francisco has a LEED Silver
requirement for new construction and major renovations of existing buildings
exceeding 25,000 square feet. Dallas mandated LEED certification for new
construction as of 2011. Los Angeles mandates LEED certified status for all new
buildings exceeding 50,000 square feet as of 2012. In Washington D.C. all new
construction of commercial buildings greater than 50,000 square feet will
require certification after January 1. 2010. These local LEED requirements
constantly change and must be integrated with local building codes which also
constantly change. The overall trend is for local LEED requirements to covering
more building categories at higher certification level resulting in larger
EPAct tax deduction opportunities. With state and local government building
projects, the EPAct benefits also go to the LEED design team.

Conclusion

The EPAct building energy efficiency tax deduction tax provisions require
building energy simulation modeling to secure the HVAC and building envelope
EPAct tax deductions. The LEED new building system requires the same type of
building energy simulation modeling to become LEED certified. With 40,000 LEED
building projects in registration tax advisers for property owners and
government building A & E firms should be helping monetize EPAct tax
deductions related to tens of thousands of buildings. The nations current
emphasis on tax supported alternative energy investments means that more
buildings can easily qualify for LEED and hence even more EPAct tax deduction
opportunities.